Tariffs Are the Wrong Way to Fight Unfair Trade Practices

Executive Summary

As is the case on so many issues, President Trump has sounded schizophrenic on trade. While he took a hardline protectionist stance during the presidential campaign and for much of his first year in office, he and several of officials of his administration have signaled in recent months that they were rethinking their hostility toward multilateral approaches to trade problems. But Trump’s recent declaration that he plans to impose steep tariffs on the imports of steel and aluminum coupled with yesterday’s announcement by Gary Cohn, the president’s chief economic adviser and a free trader, that he’s quitting, suggest that Trump’s protectionist side is dominating once again. This is a reason for concern because tariffs and protectionism in general won’t do anything to address a major underlying cause of distortions in global trade: the subsides of China and other countries for their state-owned enterprises (SOEs). Those subsidies stimulate excess production, depress market prices, and enable SOE-produced products to capture market share beyond accepted norms of competition. Given that only 2% of U.S. steel imports come from China and U.S. aluminum imports account for only 1.4% of China’s aluminum production, the tariffs will neither reduce China’s global exports of these metals nor constrain its SOEs.

Danny Lehman/Corbis/VCG/Getty Images

As is the case on so many issues, President Trump has been all over the map on trade. While he took a hardline protectionist stance during the presidential campaign and for much of his first year in office, he and several of officials of his administration have signaled in recent months that they were rethinking their hostility toward multilateral approaches to trade problems. But Trump’s recent declaration that he plans to impose steep tariffs on the imports of steel and aluminum, coupled with this week’s announcement by Gary Cohn, the president’s chief economic adviser and a free trader, that he’s quitting, suggest that Trump’s protectionist side is dominating once again.

In my estimation, this is a reason for concern because tariffs and protectionism in general won’t do anything to address a major underlying cause of distortions in global trade: the subsides of China and other countries for their state-owned enterprises (SOEs). Those subsidies stimulate excess production, depress market prices, and enable SOE-produced products to capture market share beyond accepted norms of competition.

Given that only 2% of U.S. steel imports come from China and U.S. aluminum imports account for only 1.4% of China’s aluminum production, the tariffs will neither reduce China’s global exports of these metals nor constrain its SOEs. The object of the next likely round of U.S. retaliation against China — for its theft of intellectual property and forced technology transfers, frequently by SOEs — underscores the need to restrict those enterprises.

Ironically, the resurgence of protectionism in the White House follows progress by a number of countries, including the United States, to agree to cooperate in curbing SOEs via multilateral actions. First, the tightest constraints on SOEs to date were included in the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and the EU-Canada and EU-Japan free-trade agreements. Second, the European Union, Japan, and the United States announced their intent to coordinate actions to curb SOEs. Third, the Trump administration seemed to have done an about-face on its original opposition to the CPTPP and the possibility of working with like-minded coalitions at the World Trade Organization (WTO).

Altogether, they suggested that the stage was set to make significant, long-term progress on SOE abuses. Here’s more detail on those developments.

New Rules to Curb SOEs

In January 2018, the 11 countries in the CPTPP (which is the successor to the TPP, the agreement from which the United States unwisely withdrew) agreed to the strongest set of SOE rules to date. Indeed, the SOE provisions in CPTPP were largely drafted and negotiated by U.S. trade negotiators. The ground-breaking rules will do the following:

prohibit countries from providing subsidies to their SOEs in many cases

mandate that countries list all their SOEs on a public website and disclose their ownership stakes in SOEs, the titles of government officials serving as officers or board members of SOEs, the annual revenues of SOEs, and information on any policy or program that provides subsidies to SOEs

require commercial sales and purchases be made on the basis of commercial considerations (price, quality, availability, transportation, and marketability) — which means government contracts go to the lowest bidder without discrimination in favor of domestic companies

Similar provisions appear in the EU’s recently negotiated free-trade agreements with Canada and Japan.

These rules send a powerful message to all WTO members that SOE restrictions are feasible and politically possible. Such precedents in regional free-trade agreements have in the past created momentum for inclusion of new rules at the global level. For example, rules on services trade and intellectual property in the North American Free Trade Agreement (NAFTA) led to WTO’s adoption of similar provisions. Progression from the regional to the global will not be easy, but, the proverbial journey of a thousand miles begins with a single step.

An About Face?

Before the events of the last couple weeks, there were encouraging indications that the Trump administration was rethinking its opposition to multilateral remedies for trade problems.

On January 25, President Trump said in Davos that he was open to joining the CPTPP “if we were able to make a substantially better deal.” On February 27, Treasury Secretary Steven Mnuchin disclosed in Washington that renegotiating CPTPP was “on the table.” He added: “I’ve met with several of my counterparties and other people, and we’ve begun to have very high-level conversations about TPP.”

A bipartisan group of 25 U.S. senators is urging the administration onward. In a recent letter to the president, they encouraged the administration to rejoin CPTPP, stating that the agreement “can serve as a way to strengthen our ties with our allies in the region, counter the influence of the People’s Republic of China, and increase pressure on the PRC to adopt substantive and positive economic reforms.”

There had also been signs that some of the administration’s hostility to the WTO was subsiding. At the conclusion of their WTO meeting in Buenos Aires in December, ministers of the EU, Japan, and the United States issued a joint statement of agreement to enhance trilateral cooperation in the WTO and other forums on combating market-distorting subsidies, state-owned enterprises, and protectionist practices. And U.S. trade representative Bob Lighthizer said at the meeting that he was open to working on U.S. priorities through WTO negotiations and praised a new initiative of 70 members to explore e-commerce issues.

EU and Japanese Overtures to the U.S.

For their part, the EU and Japan have made it clear that they would like to team up with the United States in combating SOEs.

On January 25, at the World Economic Forum in Davos, Cecilia Malmstrom, the EU’s commissioner of trade, told reporters that although she was worried about the Trump administration’s threats to wage a trade war with China, Europe had its own issues with China and would welcome a chance to coordinate its response with the United States. “There are some grave concerns on China, who are massively subsidizing state-owned companies,’ she said. ‘And there, yes, we could work with the U.S.”

This statement and the joint statement at the end of the WTO meeting indicate unusual unanimity among the Big Three on China’s SOE’s, and the United States should move promptly to capitalize on it.

U.S. unilateral action on tariffs will reduce the trust required to build coalitions in the WTO and with allies. The departure of Cohn, the principal advocate of a multilateral approach in the administration, will only increase concerns. The Trump administration must not overlook this cost of proceeding on its own.

The opportunity is at hand for the United States to join forces with other countries in seeking permanent restrictions that reduce the market abuses perpetrated by SOEs. This should be the U.S. focus, not protectionist measures such as tariffs. Protectionist steps will only undermine the efforts to rein in SOEs.

Sherman Katz is a senior advisor to the Center for the Study of the Presidency and Congress. He previously was a partner in the Washington, D.C. office of Coudert Brothers, where he practiced international trade law for 30 years.